By: Jeff Cohen
Home health agencies everywhere have become the favorite targeted acquisitions of “the financial world.” Apparently, there is one seminar that every buyer attended convincing buyers or all kinds (buyers with money, buyers without money, buyers in the private equity space) that:
- HHAs are ripe for aggregation because the industry is disaggregated; and
- HHA owners lack business sophistication necessary to bring their businesses to the “next level.”
Unfortunately, some of the buyers lack any true industry experience and are looking at acquisition targets solely from a financial perspective. They’re looking principally at business financials and nothing else. And, worse yet, they’re not focused on the centrality of operational expertise. All of which can come crushing down on the head of seller financed acquisitions. In other words, if the buyer is paying the purchase price over time, the seller is effectively financing the transaction because the purchase proceeds are (in theory) coming from seller operational profits. This may make the transaction possible, but operations will ensure company profitability and growth, which is gonna drive seller interest.
So what? A lot! As current HHA owners know, the secret sauce is in not financial analytics. It’s in the operations! And the financial due diligence is just a part of the equation. What about regulatory due diligence? What about knowing where the bodies are buried (legally speaking)? What are the payer relationships? What are the marketing relationships? What is really driving the business? Who is the key reason why the HHA is successful? It is typically one or two people. And missing that or retiring them is a recipe for disaster for buyers and seller financed sellers. As is missing illegal payments made to induce patient referrals, which can shut down even a completed transaction in a heartbeat. None of this is part of the usual [financial] due diligence!
Lawyers might say “Yeah, but there will be plenty or reps and warranties to cover the transaction. And the indemnification sections will be tight.” So what? The buyer doesn’t want a pig in a poke. They want a reliable and growing income stream. Details matter. Especially the details both buyers and sellers are missing!
Further, if a buyer thinks they can buy an HHA on the cheap (1) without proper due diligence, (2) with lawyers waiting to get paid if the transaction closes and funds, and (3) with heavy seller financing, think again. If you’re dealing with a buyer with pockets (or you have pockets) and will spend the right money on proper due diligence, the right (and experienced) marketing and management, have at it! The HHA industry is ripe for aggregation. But doing it in “the new way” isn’t new at all. It’s just defective and a recipe for lots of heartache…and litigation.
Real buyers love due diligence. They love to measure twice (three times is even better!) and cut once. They love either understanding the business they’re buying or buying the operational talent. And they understand and embrace the notion of putting hard money to work. They don’t try to buy something for nothing or find lawyers who don’t have enough work to do who are willing to work for free. Real buyers are not trying to get something for nothing. And they don’t allow a financial flow focus to blind them to the daily “wax on; wax off” aspects of the business. Doing so would disappoint both sellers and buyer investors.
It’s great to see so much activity in the HHA space. But the ones that win and stay will only be the ones that do it the old fashioned away—They’ll Earn It!